Intertemporal portfolio allocation and hedging demand: An application to South Africa
AbstractThis paper analyses the intertemporal hedging demand for stocks and bonds in South Africa (SA), the United Kingdom (UK) and the United States (US). The analysis is done using an approximate solution method for the optimal consumption and wealth portfolio problem of an infinitely long-lived investor as developed by Campbell, Chan and Viceira (2003) and extended by Rapach and Wohar (2009). Investors are assumed to have Epstein-Zin-Weil-type preferences and face asset returns described by a first-order vector autoregression in returns and state variables. The results show that the mean intertemporal hedging demands for stocks are considerably smaller in SA than in the UK or the US, whilst the mean intertemporal hedging demand for bonds are not significantly different from zero in any of the countries considered. Furthermore, it is found that stocks in the US and the UK do not present a useful hedging opportunity for an investor in SA, nor do SA stocks present a useful hedging opportunity for investors from the UK or the US.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201133.
Length: 27 pages
Date of creation: Dec 2011
Date of revision:
Intertemporal hedging demand; Multi-period portfolio choice problem; Parametric bootstrap; Return predictability; South Africa;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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